Employment costs for small firms revealed

Small businesses pay an average of £35,500 to hire their first employee, according to research by the Centre for Economic and Business Research (Cebr) and the Federation of Small Businesses (FSB).

In comparison, businesses with 20-49 employees face a bill of £25,100 per worker.

The report into employment costs for small firms found that a small business with 7 workers faced total employment costs averaging £189,600 in 2013. Of this, 15.1% was spent on non-wage costs such as admin and national insurance contributions (NICs).

The research revealed that aside from salaries, firms must pay for:

class 1 NICs (12.7% of total employment costs)

running a payroll (4.1% of non-wage costs)

administration (8.1% of non-wage costs)

maternity leave (0.1% of non-wage costs).

The Cebr looked at a number of possible changes to government policy and their impact on small businesses:

Cutting class 1 NICsReducing class 1 NICs would have a positive impact on small firms. If the headline rate for class 1 NICs was reduced from 13.8% to 11.8%, costs would fall from £189,000 to £187,400.

Increasing the National Minimum Wage (NMW)The Cebr believes an increase in the NMW would have a minimal effect on small firms because most employees earn more than the minimum wage. However, costs for a small firm employing 6 minimum wage workers and an owner would rise by 14.4% if the NMW rose to the living wage (£7.65 per hour) by 17.9% if the NMW rose to £8 per hour.

Pensions auto-enrolmentEmployer pension contributions for auto-enrolment will rise from 0.5% to 3% when the scheme has been rolled out to small businesses. Non-wage costs will rise from 15.1% to 16.3% and total employment costs from £189,600 to £192,400.

Charles Davis, director at the Cebr, said:

"This research follows a significant rise of self-employment in an increasingly entrepreneurial Britain. But one of the key findings here is that hiring one's first employee costs a lot more than just paying their wages. This raises the question: could the government do more to make it easier for the plethora of one-man bands and micro businesses to take on more employees?"

John Allan, national chairman of the FSB, said:

"Small businesses have been responsible for many of the jobs created in recent months and this must continue. What this new index shows, is the cost of taking on your first member of staff can be considerably higher than taking on your twentieth. The future growth of the UK economy depends on more entrepreneurs taking the leap to becoming employers. This means government has to redouble its efforts to make it cheaper to hire staff."